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This publication is available at https://www.gov.uk/government/publications/income-tax-dividend-allowance-reduction/income-tax-dividend-allowance-reduction
Who is likely to be affected
Individuals with dividend income above £2,000.
General description of the measure
This measure reduces the tax-free allowance for dividend income from £5,000 to £2,000.
This measure will ensure that support for investors is more effectively targeted and that the total amount of income they can receive tax-free is fairer and more affordable, in light of increases to the tax-free personal allowance and the Individual Savings Accounts (ISA) allowance. It will also partially reduce the tax difference between the self-employed and those working through a company.
Background to the measure
At Summer Budget 2015, the government announced that dividend taxation would be reformed from April 2016 by replacing the Dividend Tax Credit with a £5,000 dividend allowance, and increasing the rates of tax paid by 7.5 percentage points in each band, to 7.5% for basic rate, 32.5% for higher rate, and 38.1% for additional rate.
The £2,000 allowance will apply from 6 April 2018.
The current law for the rates of tax for dividends received by individuals is included in Chapter 2 of Part 2 Income Tax Act 2007. Section 13 sets out the main rates and section 13A provides that an amount, currently £5,000, is charged at a nil rate.
Legislation will be introduced in Finance Bill 2017 to change the amount of dividend income that is charged at the nil rate by section 13A to £2,000 from tax year 2018 to 2019.
Summary of impacts
Exchequer impact (£m)
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These figures are set out in Table 2.1 of Spring Budget 2017 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2017.
This measure is not expected to have any significant macroeconomic impacts.
The costing accounts for multiple behavioural effects including the increased incentive to use ISAs, behaviours to reduce taxable dividend income and the lower incentive for individuals to incorporate.
Impact on individuals, households and families
Individuals and households who receive dividend income in excess of £2,000 will be affected. Around two thirds of all those with dividend income, will be unaffected by this measure. It is estimated that this will affect around 2.27 million individuals in 2018 to 2019 with an average loss of around £315.
The measure is not expected to impact on family formation, stability or breakdown.
The government estimates that significantly more men will be affected by this measure than women with men making up two thirds of the affected population. Approximately 18% of the estimated affected population are over 65 - this doesn’t represent a disproportionate impact. It is not anticipated that any other group with protected characteristics will be disproportionately affected.
Impact on business including civil society organisations
This measure is expected to have no impact on businesses or civil society organisations as it relates only to individuals who are shareholders.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
HMRC expects the cost of implementing this change to be negligible.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns.
If you have any questions about this change, please contact John Moore on Telephone: 03000 570578 or email: firstname.lastname@example.org.